The Principal-Agent Problem; A Stochastic Maximum Principle Approach

2014/10/23 by Djehiche, Boualem, Helgesson, Peter
#49N70 #49N90 #93E20 #FOS: Mathematics #Optimization and Control (math.OC)

paper · doi:10.48550/arxiv.1410.6392

Abstract

We study a general class of Principal-Agent problems in continuous time under hidden action. By formulating the model as a coupled stochastic optimal control problem we are able to find a set of necessary conditions characterizing optimal contracts, using the stochastic maximum principle. An example is carried out to illustrate the proposed approach to the Principal-Agent problem under linear stochastic dynamics with a quadratic performance function.

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